How big can New England's regional cap-and-trade program get?

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The first U.S. cap and trade program designed to reduce greenhouse gas emissions from the electric power sector has proven so successful that some supporters are now wondering if it ought to go national.

About the same time the 2009 energy bill's national cap-and-trade plan was struggling in Congress, several Northeastern states were forming a program of their own. Senate skeptics stopped the Waxman-Markey proposal, but New England’s Regional Greenhouse Gas Initiative (RGGI) prevailed.

The latest numbers show it is responsible for millions of tons of avoided greenhouse gas emissions (GHGs) and billions of dollars in benefits to electricity users throughout the region.

Two new states are now applying to join the current nine members. And several more states have shown a willingness to discuss the privileges of membership with RGGI leaders.

Industry doubts

RGGI had an abundance of doubters while the program was being designed between 2005 and 2009. The Edison Electric Institute (EEI), on behalf of U.S. electric utilities, raised questions ranging from whether participating states could handle the cap and manage the trading to whether the concept was constitutional.

The program was designed around a cap on emissions of carbon dioxide (CO2) from the electric power generation sector. CO2 is the most prominent of the climate change-driving greenhouse gases (GHGs) emitted by the burning of fossil fuels. There is a small provision in the program for other GHGs, but CO2 is its primary target.

The program’s original Model Rule requires power plants in the region of 25 MW or more to keep their emissions below an allotted share of the cap. But each participating state issues CO2 allowances, which power plant owners can purchase in regional auctions if they choose to exceed their cap.

The auctions create a competitive market through which a cost of CO2 emissions is set. That extra cost for generating electricity is an incentive for fossil fuel-burning power plant owners to use available technologies to reduce emissions. It also gives non-CO2-emitting power plants such as wind and solar projects a competitive opportunity.

RGGI’s Model Rule is reassessed and revised every three years. As part of the revision, the cap is adjusted downward to increase emissions reductions. New numbers on emissions reductions and economic benefits over the most recent three-year compliance period left no doubt of RGGI’s success.

As a result, the nine participating states of Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island and Vermont agreed to tighten the emissions cap 30% from 2020 to 2030. Achieving it would bring total RGGI emissions to more than 65% below the 2009 cap.

The 2017 Model Rule also implements new protections for allowance supplies and auction prices. It reflects a new level of ambition for the program by participating states. RGGI has received applications from Virginia and New Jersey to join the program, while some RGGI advocates are talking about the possibility of a “50 states” program.

The success

Emissions are measurably down, according to Acadia Center Policy Analyst Jordan Stutt. Acadia Center, an environmental and renewable energy advocacy group, has been part of RGGI’s development since its inception. Its assessment, based in part on work by the Duke Nicholas Institute, found 2017 emissions were 51% below levels in 2008, at the beginning of RGGI auctions, Stutt told Utility Dive.

That includes an 18% year-on-year drop from 2016 to 2017, the biggest drop-off in emissions since the region’s use of coal leveled off, Stutt added. The newest cuts in emissions come from the accumulating potency of the energy efficiency and clean technology investments made with auction proceeds.

There were $1.4 billion in net economic benefits for the nine states from 2015 through 2017, the Analysis Group found. The program created “over 14,500 new job-years (the equivalent of one full-time job for the duration of one year),” the Analysis Group added. “All of the participating RGGI states experienced benefits, including employment growth and net economic benefits for electricity consumers, with those dollars flowing back into the local economy.”

The extra cost for CO2 has moved wholesale electricity prices up, the Analysis Group report acknowledged. But that was offset by significant advances in energy efficiency, which lowered the amount of electricity consumed, lowering customers’ total electricity bills.

Since 2009, consumers have experienced a net gain of $220 million. Electricity customers saved $99 million, and natural gas and heating oil customers saved $121 million, the Analysis Group found. Those gains are in addition to other economic benefits created by investments of allowance auction proceeds into local economies.

How RGGI creates economic benefits

Investments in local economies have been key to RGGI's economic benefits. Almost $2.8 billion in auction proceeds have gone to participating states since 2009, the Analysis Group reported. It was invested in EE, renewable energy, GHG-emission reduction efforts, electricity bill assistance, and education and job training programs. That investment resulted in over 30,000 job-years created between 2009 and 2014.

There was doubt that RGGI benefits could continue under the tightened CO2 cap set in 2014, Analysis Group Principal and report co-author Paul Hibbard told Utility Dive. The fear was that more severe emissions reductions requirements would drive the price of electricity too high and stifle the economy.

But new, low-cost renewables generation and energy efficiency allowed participating states to deliver a cumulative power bill reduction of “over $220 million” while meeting the new cap.

Slow economic growth, flattening demand, lower natural gas prices and lower costs for renewables generation have also accelerated emissions reductions since 2009 by reducing the use of fossil fuel-generated electricity, he acknowledged. But any conclusion that RGGI was ineffective reflects “a misunderstanding of how cap and trade programs are designed to work.”

There can be little doubt of significant accomplishments, Hibbard said. In part, the gains were produced by auction proceeds investments in energy efficiency, renewables and other-sector GHG reductions, he said. They also resulted from the increase in “the relative cost of operating the most carbon-intensive generation,” which reduces its dispatch.

The emissions cap, which ratchets down over time, sets “a maximum level of allowable emissions regardless of what happens in the economy,” he said. “That is a financial signal to invest in lower-carbon technologies that decreases the system's emissions to at or below the known, and decreasing, cap levels over time.”

He noted one further proof of cap and trade's success. The “fuel switching from coal/oil to natural gas” that characterized the first two RGGI compliance periods has abated, Hibbard said. But “RGGI's ever-declining cap sends signals for continued evolution of power systems away from gas and towards greater production from low- and zero-carbon sources.” This shows RGGI can continue cost-effectively driving the use of new technologies.

RGGI Board Chair Ben Grumbles, who is Maryland’s Secretary of the Environment, said the Analysis Group report affirms RGGI’s own data. This shows “bipartisan teamwork on climate and clean energy wins economically as well as environmentally,” Grumbles told Utility Dive. “The numbers speak for themselves.”

The “driving force” is still GHG reductions, Grumbles said. “But this independent analysis shows there is a powerful combination of benefits from participating in a regional greenhouse gas emissions reduction program, including revenues, jobs and health benefits.”

Virginia and New Jersey

Secretary Grumbles said the technical, program design processes for bringing New Jersey and Virginia into RGGI are going well.

Virginia has completed its program design and stakeholder responses have been filed. But strong political opposition in the legislature leaves the fate of the technical process in doubt. That means actual participation is unlikely before 2019 or 2020.

New Jersey was a founding member of RGGI in 2009, but was pulled out by Governor Chris Christie in 2011. An executive order from Governor Phil Murphy (D) started the development of a new program design. After the Department of Environmental Quality approves the program design, it could be finalized by a Department of Public Utilities regulatory proceeding in time to participate in 2020 auctions.

Each state designs its own program but must ensure “fungibility of allowances among the states,” Grumbles said. “We are working to respect Virginia’s sovereignty but make sure any roadblocks to its participation are removed. And we have had constructive conversations with New Jersey.”

Gov. Ralph Northam, D-Va., approved the proposed program design. The Virginia Department of Planning and Budget testified that the proposed program could generate a cumulative estimated 10-year benefit of $460 million to $680 million.

A Joint Industry filing from Calpine Corporation, Consolidated Edison of New York, National Grid and NextEra Energy endorsed the 2017 updates to RGGI's program design, which helped shape Virginia's proposal.

A filing by Dynegy, which owns 4,700 MW of generating capacity in the RGGI region, said those updates to the RGGI program design appropriately balance “continuing to drive CO2 reductions from the power sector and pushing the sector too far.” It agreed with the Joint Industry filling that mechanisms to prevent auction prices from going too high or low will be “true safety-valve provisions” and not “market-limiting interventions.”

The strongest opposition is from the coal industry.

The Virginia Coal and Energy Alliance (VCEA) rejected the proposal. “The benefits provided by the coal and coal-related industries should only be placed at risk if the justification for doing so is clear,” VCEA said.

The benefits of the proposed program are “anything but clear, as it unfairly compares an underestimated assessment of real-world local costs and economic impacts to a theoretical and now-rejected overestimate of global benefits,” VCEA added.

The program will cause an electricity price increase “of over 7% and present a significant burden on the coal and coal-related industries,” VCEA said. "Alleged” benefits “are based almost entirely on the highly controversial ‘social cost of carbon.’”

Acadia Center’s Stutt said RGGI auction prices “are a tenth of what they should be” with the social cost of carbon. But states are “rapidly reducing emissions from the electric sector and not imposing costs on consumers,” he said. “That demonstrates emissions can be reduced rapidly at much lower costs than projected.”

Into regulated markets?

Secretary Grumbles said a major goal for 2018 is growing RGGI’s impact and size. “We have recently had conversations with the District of Columbia and North Carolina, and with Pennsylvania, which is a hugely important player in the region,” he said.

The Analysis Group report found that RGGI’s “tradeable-allowance structure operates well in both regulated and competitive electric industry contexts and integrates seamlessly with electricity market operations.”

Grumbles and Hibbard agreed. “All of the current RGGI states operate in competitive wholesale markets but the program can efficiently work to control carbon emissions just as well in regulated, vertically integrated states like Virginia and North Carolina,” Hibbard said. “That doesn't mean it wouldn’t increase the administrative complexity, but it can expand to as large a program as administrators can handle.”

The Analysis Group also found “a broader trading market with more participants creates the opportunity to lower overall costs of compliance” because the cost of auctioned allowances would likely be lower.

Expansion only requires agreement on the cap, the value of an allowance, and “fungibility across states” so allowances can be traded, Hibbard added.

The 50-state solution

Acadia Center’s Stutt said the addition of New Jersey and Virginia is a great step, but “there is no technical obstacle to all 50 states becoming part of RGGI.” It only requires the political will, he said. “The bigger the system, the greater the opportunity for low cost emissions reductions. It's also better for businesses to have one policy across their range of operations.”

The often-rumored, but completely unofficial, idea of linking RGGI with California's emissions market and the seven states and fout Canadian provinces in the Western Climate Initiative (WCI) is not unreasonable, he added.

Secretary Grumbles said he has had "conversations" with representatives of both California and the WCI, and he does not object to a "50-state program.” The intent has always been for RGGI to serve “as a model for broader approaches” and “demonstrate that a carbon cap-and-invest framework could work in the U.S. power sector,” he said.

“We are consensus-based and it does take time to reach consensus,” he added. “Growth is good, but we need to get into the nuances and details, so there may be reasons to take it one step at a time and understand some changes may take time.”

Farther out on the Northeast's agenda is addressing emissions in the transportation sector.

Acadia Center’s Stutt said the transportation sector “is by far the largest source of emissions in the Northeast, and there are not adequate policies to meet our 2030 and 2050 reduction targets.”

RGGI’s success offers “lessons that can be applied to the transportation sector,” he added. “That does not mean expanding the current RGGI program to cover the transportation sector. RGGI has laid the groundwork for state-level collaboration and cooperation. The blueprint is there.”